A new financial product, the S&P 500 Market Index CD, is being marketed as a safety net for stock market investments by combining the security of a CD with an opportunity to participate in the stock market.
For low-risk investors, it`s an excellent vehicle to share in profits of a rising stock market while protecting the original investment. It`s safely insured, up to $100,000, by the FDIC, and is routed through Banker`s Trust of New York.
“It`s a CD that gives growth potential with the safety of the principle,” said Paul Snow, investment broker at Morgan Keegan of Jackson. “There`s a direct benefit if the stock market, and S&P, does well.”
Because S&P gained 28% last year, the S&P 500 Market Index CD was born as a result. The S&P 500 Price Index, the stock market measuring stick most often used by institutional and professional investors, measures price activity of stocks of 500 top U.S. corporation without including dividends. The Market Index CD avoids many risks involved with investing in a limited number of singular stocks by associating it with the performance of the diversified S&P Index, Snow said.
The minimum investment is $5,000, with $1,000 increments afterwards, and CDs are usually issued for 5 to 15 year terms. There`s no sales load, but there is an early withdrawal penalty of 6% to 8%. Retirement accounts can be invested with $2,000. However, if the S&P 500 Market Index is doing well, it might be worthwhile to absorb the early withdrawal penalty and reinvest, Snow said.
“For example, if S&P did 30% on a $100,000 CD, even after an 8% early withdrawal penalty, you`ve still got 22%,” Snow said. “That`s $122,000 guaranteed that you can reinvest.”
A mutual fund is comparable, Snow said, but is not FDIC-insured. Taxes on CDs can be deferred if set up through an IRA. Otherwise, approximately 7% of income will be taxed annually. Prices are updated quarterly rather than monthly, he said.
Investors of all ages are buying the new financial product, and people with existing CDs are purchasing them to diversify, Snow said.
Market Index CDs will be available from Sept. 10 to 23, he said.